<B> USOP Spins Off Travel</B>
By Sarah Welt
<i>Washington, D.C.</i> - U.S. Office Products, the travel industry's fastest-growing new mega agency, last week announced plans to spin off four separate companies, including one each in the corporate travel services, education, print management and technology businesses.
Scheduled for the second quarter, the restructuring will allow the divisions to move forward with clearer identities and make it easier for those on Wall Street and industry insiders to follow USOP's strategy, the company said.
For the travel industry, the move will create the first independently traded business travel mangement company. Until now, only American Express, which is both an agency and a financial services company, has been listed on Wall Street.
USOP's travel division was created in 1997, and already claims sales of $1.6 billion. Its president, Ed Adams, will become president and CEO of the new and as yet unnamed company, and travel division CFO Bob Griffith will be its CFO. But Adams said he doesn't think all 11 travel agencies acquired to form the current company will change names. "Branding and identity are one thing," he said. "What we call an agency in a particular market is another."
The spinoff will allow each company to better leverage its counterparts in a cross selling strategy that likely will become more formal over time. "The travel piece is probably the strongest piece of cross selling opportunity," Adams said. "An office supply contact might be used to get the travel division in to do corporate managed travel."
The USOP restructuring and spin-off strategy involves a $1 billion self-tender for 37 million of the 130 million outstanding shares, at $27 per share. The private equity firm of Clayton, Dubilier & Rice Inc. will invest $270 million in the restructured company when the self-tender and spin-offs are completed for a 24.9 percent equity interest, in addition to the ability to purchase one additional share of common stock for each share of USOP stock acquired.
The self-tender offer will be financed through proceeds of CD&R's equity investment and a combination of bank loans and high-yield debt. USOP said the restructured company plans to have $1.3 billion in debt at the completion of the reorganization. In all likelihood, the spin-off firms will qualify for tax-free treatment, the company said.
Current USOP chairman Jonathan Ledecky will step down from his post at the completion of the restructuring program, and be replaced by Charles Pieper, a principal with CD&R. Ledecky will be a senior advisor to the spin-off companies.
Despite the company's efforts to simplify its story in the hopes that the announcement would boost stock prices, as of last week, USOP was trading at about $18. Brad Cohen, senior analyst at Manhattan-based Sands Brothers and Co., valued the company "on the low side at $23" and suggested it is undervalued in part because "people don't want to take the time to look into the story."
Due to the stock price shortfall, Cohen said, there is potential for someone to try to take over the various companies.
Despite that possibility, "it's pretty much business as usual" in the travel division, Adams said. "We are going to look to grow through the acquisition of profitable, well-run companies," and the announcement last week is "probably going to accelerate some of the plans we had to develop branding identity and sales and marketing programs and to consolidate some of the back-room functions."
While acknowledging the "obvious need to perform and show Wall Street we can meet earnings expectations and continue to show good margins as a separate public company," Adams said the new structure offers potential investors "a lot cleaner story.